Economic Perspectives

Steve Scranton

SVP, Chief Investment Officer and Economist

Perspectives

For those of you who are long-time readers of this newsletter or who have heard me give economic presentations, you know that I examine the economy through the lens of jobs. My logic is that since consumer spending has been the engine that has driven this economy, we need to understand where the average consumer derives their income. Based on the most recent data from the Bureau of Economic Analysis (BEA), wages and salaries make up 52% total personal income. For the average worker that percentage is probably higher since they do not have rental properties or an investment portfolio that generates income for them. So, the chain of events that leads to consumer spending is, first, jobs are created. That generates wages and salaries. Wages and salaries are then used to fuel consumer spending.

So, if job creation is a critical part of economic growth, loss of jobs is a critical factor in slowing economic growth and potentially causing a recession. Thus, if we are trying to monitor factors that may change the current growth of the economy, monitoring job losses is important. In general, when someone loses their job, they will file for unemployment benefits if they qualify. The Department of Labor provides a weekly report on filings for unemployment benefits. Since “filing for unemployment benefits” is a mouthful, it shortens the term to jobless claims. There are two types of jobless claims: initial claims and continued claims. Initial claims measure the number of people making their initial application for unemployment benefits. Continued claims measure the number of people who continue to file for unemployment benefits following their initial claim. If you remain unemployed, you continue to file for claims.

To me, each type of claim serves a different role in monitoring the potential impact to the economy. Jobless claims help us understand when businesses start laying off employees but it does not tell us whether that is a sustained hit to the economy. If someone quickly finds work, then the impact may be minor. Continued claims tell us if more and more people are having trouble finding work and need continued unemployment benefits. That helps us monitor the potential for a sustained impact to the economy.

This week, I am going to provide analysis on both initial and continued claims with regards to whether the data provides warning signs in advance of a recession. 

• I am using data from the Department of Labor and the data is current as of the report released yesterday (12/14/23).
• Since weekly data can be “noisy” and volatile, I am using a 12-week moving average. Since the data is weekly, 12 weeks approximates 3 months. This helps smooth out some of the volatility.
• I am also providing a linear trend line to see if it provides any additional information or insight into the data.
• I am examining the data starting from a year before each recession. The orange vertical line marks when the recession officially started.

Since there have been eight recessions since 1964, that mean 16 graphs. As a result, I am once again going to attempt avoid having this newsletter drag on forever. I will provide the graphs with minimal commentary and then provide more commentary in the Closing Thoughts sections.

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Initial Claims

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Continued Claims

Closing Thoughts

• Examining the graphs shows that Continued Claims have shown a better track record compared to Initial Claims for providing a potential recession warning.
  • Out of the eight recessions, Initial Claims had three times where the 12-week average gave no warning before the recession started.
    • The trend line had two times when it was declining when a recession occurred and one time when it was essentially flat.
  • For the five times where the 12-week average was rising before the recession hit, the average lead time was four months.
  • Out of the eight recessions, Continued Claims had one time where no warning was triggered.
    • The trend line had three times when it was declining when the recession occurred.
  • Four the seven times that the 12-week triggered a warning, the average lead time was seven months.
• The trendline was interesting but did not really add additional value over the 12-week average.
• Currently, Continued Claims are not triggering a warning and, in fact, gave a false signal in the first half of the year since the average rose for six consecutive months before declining for four consecutive months.
• I believe Continued Claims is another data set worth monitoring to see if conditions worsen or stabilize.
• Once again, there is no perfect data set that can be relied on for identifying a recession. As we have seen with this economic cycle, many historically reliable indicators have signaled a recession looming and yet jobs continue to grow, consumers continue to spend, and the economy continues to grow.
• Just because the reliable indicators (including Continued Claims) have not been accurate in this economic cycle does not mean they should be discarded and ignored. Trying to decipher the prospects for economic growth is like trying to put all of pieces together for a mosaic.
• It is always better to prepare for bad conditions while times are good. 
  • To use the analogy of a severe weather event, if you prepare in advance, you can survive when the storm arrives. If the storm does not arrive, you are still glad that you were prepared. Monitoring various indicators is a tool to help us all prepare.

Note:

I have changed the format for the Economic Data. My goal is to find ways to present in information in an understandable format while striving to keep it in a concise form. As a result, I have converted this section to a table. This will also reduce the number of pages for the newsletter!

Economic Data